Sell Discipline
Our sell discipline is based on the philosophy that the key difference between a losing strategy and a winning strategy is that losers make big mistakes and winners make small mistakes. Thus, our sell discipline is designed to help keep the inevitable individual mistakes from causing large, permanent loss of capital in the broader portfolio. Perhaps the most distinguishing characteristic of our sell discipline is that we do not average down on losing positions.
There are three circumstances in which we sell a holding:
- Objective Achieved. We will sell a holding when it achieves our price target or becomes too large in the Portfolio (exceeding 5% of the Portfolio’s assets).
- Failure to Execute. We will sell a stock if its fundamentals turn negative and/or give us reason to believe it will not achieve our expectations within an acceptable level of risk. This may occur if warning signs emerge within a specific company or industry.
- Losses Develop. We seek to control total unrealized losses in the Portfolio by adhering to a policy of trimming losses before they adversely impact our portfolio’s overall performance. Individual security thresholds will vary based on the size of position, security beta, etc. Losing positions may also be trimmed or liquidated in accounts if total unrealized losses in the Model Portfolio, as a percentage of total assets, exceed a pre-determined target. This figure is a risk management threshold that has historically proven valuable in managing total accumulated portfolio losses. Of course, in a protracted bear market, that target percentage will increase. Ultimately, this ongoing process forces us to re-evaluate our losing positions as well as our conviction in each company.